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Executive Summary: On February 16, 2018, the United States Court of Appeals for the Ninth Circuit granted en banc review of Marsh v. J. Alexander’s LLC, 869 F.3d 1108, creating a new layer of uncertainty for hospitality employers. The previous decision by a three-judge panel on September 6, 2017, had rejected what is commonly called the “80/20 rule,” which states that hospitality employers may not reduce a tip-earning employee’s hourly pay below the minimum wage when that employee spends more than 20 percent of his or her workweek on non-tip-earning tasks. The case will now be reconsidered by a larger panel of the Ninth Circuit, with oral argument scheduled for the week of March 19, 2018. The grant of en banc review suggests an intention to reconsider the panel’s prior holding or analysis.

Marsh v. J. Alexander’s Shake-Up:

In a 2-1 decision, the panel opinion streamlined the analysis to a determination of whether an employee is actually engaged in two separate jobs, rather than tallying a percentage of discrete tasks. This created a more workable roadmap for employers for when they can apply the “tip credit” than the previous test and could significantly reduce employer liability.

The panel concluded that the United States Department of Labor’s (DOL’s) most recent interpretation was inconsistent with both the regulation and its prior guidance, and was a de facto regulation that had not passed proper rule-making channels. Thus, the DOL’s interpretation was entitled to no deference. The dissent agreed with the Eighth Circuit opinion in Fast v. Applebee’s Int’l, Inc., 638 F.3d 872 (8th Cir. 2011), which found the regulation ambiguous, and thus deferred to the DOL’s interpretation. Moreover, as noted by the dissent, Congress and the DOL have used the 20 percent cut-off across the FLSA regulatory scheme, lending further support to the DOL’s interpretation. FordHarrison’s legal alert on the panel decision is available here.

By having granted en banc review, the Ninth Circuit may overturn the panel decision. Even if the en banc panel upholds Marsh, a split among the circuit courts could eventually be resolved by the U.S. Supreme Court, leaving the state of the tip credit unsettled for the foreseeable future.

Therefore, we would advise clients to implement the following procedures to ensure compliance with applicable law:

Continue following the 80/20 rule as currently interpreted by the DOL.

As part of good record-keeping practices, have tipped employees sign a daily certification that the amount of time they spent performing non-tip-eligible tasks, such as cleaning or other side work, or work unrelated to direct guest services (or tasks supporting such services), did not implicate the 80/20 rule. Doing so will not eliminate potential liability, but having such records will shift the burden back to employees to prove that their non-tipped side work exceeded the applicable threshold.

Create and/or review existing job descriptions for all tipped and non-tipped positions, including specific tasks to be performed by each position, and evaluate current task assignment practices for compliance with the 80/20 rule.

Have tipped employees punch in and out at point of sale to designate the start and stop times for all non-tipped tasks.

Regularly reinstruct all employees on time-keeping policies, and require tipped employees to periodically report to the employer any shifts for which they claim to have spent in excess of 20 percent or two hours on non-tipped tasks. This will allow an opportunity for investigation and a chance to rectify any possible underpayment prior to a lawsuit being filed.